China Tower IPO, investment from internet giants may boost mainland telecoms expansion

The industry’s massive state-backed infrastructure-sharing joint venture is widely expected to conduct its IPO by the end of next year

PUBLISHED : Tuesday, 27 December, 2016, 8:01am
UPDATED : Tuesday, 27 December, 2016, 9:45pm

A highly anticipated initial public offering and potential investment from mainland internet giants could give a boost to China’s telecommunications industry next year, driving the efforts of its three incumbent network operators to step up preparations for nationwide 5G infrastructure development and launch advanced new services.

China Tower Corp, the industry’s massive state-backed infrastructure-sharing joint venture, is widely expected to conduct its IPO in Hong Kong by the end of next year, a target that was reaffirmed last month by its chairman, Liu Aili.

The company was established by China Mobile, China Unicom and China Telecom in July 2014 to be responsible for all the construction, maintenance and operations of their telecommunications network towers and auxiliary infrastructure across the mainland.

Unicom, meanwhile, confirmed in October that its parent, China United Network Communications Group, was among the initial batch of participants in Beijing’s state-owned enterprise “mixed-ownership reform plan”, which would involve strategic funding from major domestic private-sector enterprises.

We expect the Tower company to improve its efficiency and break even either by the end of this year or early 2017
Nomura analysts

Speculation remains rife that China’s three major internet companies -- Baidu, Alibaba Group and Tencent Holdings -- would be encouraged by the central government to invest in Unicom’s parent. New York-listed Alibaba owns the South China Morning Post.

Analysts at Nomura Research said in a report this month that structural drivers, such as regulatory adjustments and changes in strategy and competitive environments, are factors that will continue to drive earnings, cash flow and dividends in China’s telecommunications industry.

“There should continue to be solid industry revenue growth together with a surge in data traffic,” Nomura analysts Joel Ying and Gopa Kumar said.

Thanks to the operations of China Tower, the “big three” mainland telecommunications services providers are on pace to lower their capital expenditure from this year.

According to Nomura’s estimates, total capital spending in the mainland telecommunications industry this year will decline 7 per cent to 424 billion yuan (HK$473.5 billion), from 454 billion yuan last year.

“We expect the trend of declining capital expenditure to continue for the next few years, as operators focus on base station deployment and transmission infrastructure while leveraging on the Tower company to optimise their network coverage,” Nomura’s analysts said.

They forecast next year’s total industry capital spending to record another 7 per cent decrease to 395 billion yuan from the estimated 424 billion yuan this year.

“We expect the Tower company to improve its efficiency and break even either by the end of this year or early 2017,” the Nomura analysts said. That would position China Tower to start contributing “reliable profits and cash flow” to the three network operators from next year, they added.

Based on their network asset contributions to the joint venture last year, China Mobile holds a 38 per cent share, Unicom has 28.1 per cent and China Telecom 27.9 per cent. State asset-management firm China Reform Holding has a 6 per cent stake.

Bernstein Research has calculated that China Tower, in which the three operators pay tower usage fees, was worth about 215 billion yuan based on its discounted cash flow analysis, which is a valuation method used to assess the future value of an investment.

“While we are hopeful for a late 2017 listing of China Tower, in the end it will be a function of the condition of the markets, perceived investor appetite and the government’s objectives,” Chris Lane, a senior research analyst at Bernstein, told the Post.

Lane recently said Unicom, which had 262.9 million mobile subscribers as of November 30, would be the biggest beneficiary of China Tower’s IPO.

Should the China Tower listing be at a valuation of 215 billion yuan (US$31 billion), Lane projected Unicom’s value per share to rise by 28 per cent. That would compare favourably against an estimated 20 per cent increase for China Telecom’s value per share and a 5 per cent lift for China Mobile’s.

Data from the three telecommunications network operators showed that they added a combined 508,000 new mobile base stations in the first half of this year, enabled by China Tower and the network collaboration between Unicom and China Telecom. That helped total 4G base stations to reach a record 2.52 million sites.

Lane said increased deployment of mobile base stations would help all three telecommunications operators push forward their respective preparations for future 5G services, touted to provide faster online downloads and greater bandwidth capacity than 4G.

China Mobile, the world’s largest wireless network operator, with 847.2 million total subscribers as of November 30, said earlier this months that it plans to build 20 5G sites in up to five cities for large-scale trials in 2018. By 2020, it aims to have 10,000 5G sites ready for commercial launch.

On the government-backed mixed-ownership scheme, Nomura analysts speculated that Unicom “may introduce Baidu, Alibaba and Tencent as strategic investors” of their parent firm after the operator announced last month that it had separate cooperation agreements with the three internet giants.

Without providing details, Nomura’s analysts said the new investment may help Unicom “accelerate development in new business areas, such as Internet of Things, cloud computing, big data analysis and financial technology.”

In a report this month, Citi Research analyst Cher Chen said the business connection between the three internet giants and Unicom involved data centres. Chen estimated up to 60 per cent of the outside-hosted servers of Baidu, Alibaba and Tencent are located in data centres run by Unicom and China Telecom.

Lane said data centre revenue for the two operators would continue to grow as internet services rapidly expand in China and overseas.

Data centres are secure, temperature-controlled facilities built to house large-capacity servers and data storage systems, and equipped with multiple power sources and high-bandwidth internet connections. They are largely used to host and manage cloud computing operations, which enable companies to buy, lease or sell software and other digital resources online, just like electricity from a power grid.